As I mentioned, things can get dicey around the Fed rate decision. Today is no different. Here is a 5-minute chart of EUR/USD:
Looks like the US dollar is strengthening against the Euro even though the Fed is keeping policy “unchanged”. Right now this pair is hovering around 1.451. It will be interesting to see if it can hold 1.45, an area of psychological support. If that level is breached, the next stop could be at 1.438. Stay tuned!
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Tags: account, blog, decision, dollar, EUR, Euro, eurusd, fed, forex, forextrading, free, fx, fxedu, Il, interest, Mike Conlon, pair, practice, rate, rate decision, time, USD
Last week I called out a long trade on USD/JPY, saying:
“Earlier this week the yen reached 15-year highs at 84.80 vs. the US dollar due to the Dubai news on that huge doji candle.Combined with a stochastic crossover near the 20 level could mean a possible trend-reversal, at least in the near-term.If this pair can stay below 89, then I expect strength to continue.Should it breach 89, then the next stop could be the 90.75 level.”
Well Friday was that day for the pair. As USD/JPY rocketed through the 89 level, making a high of– 90.763– before retreating a tad to rest for the next move. As you can see, I pegged that one pretty good– within .013 of the high!
How was I able to get such an accurate prediction?
The answer is Fibonacci Retracement! If you are not familiar with this technical tool, you should become familiar ASAP.
Let’s look at the chart (click here to enlarge):
From the chart above, you can see all of the Fibonacci retracement levels. These numbers are areas of “natural” resistance or support. So when I am looking at a chart, and I believe there is going to be a pullback or in this case, a reversal, I always want to take a look at the Fib retracement levels.
One of the reasons why technical analysis is so compelling is because that at times it becomes a self-fulfilling proposition, so to speak. If a lot of traders are expecting something to happen at a certain level, then chances are something will happen.
In this case, that 90.5 level stands to serve as the “last layer” of support for those who are still short this pair. I can assure you that if I know this, many far more sophisticated traders and investors know this as well. This is why I typically round up or down anywhere from 10-50 pips depending upon how strong of a move I think might occur.
Around these levels you will typically see “stop running”– trades happening above or below the Fib level as traders know that typically other traders in the opposite position will place their stops just above or below that level. That’s why on this daily chart you can see a “wick” on the candle as the pair trades up through the 61.8% level before closing just below it.
This trade made approximately 350 pips in less than a week!
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Yesterday I wrote here about how Japanese officials are attempting to jaw-bone the yen lower. Today it looks like its working. As of this writing, we’re looking at a move of almost exactly 1 point, or 100 pips in USD/JPY. Yen weakness is the theme of the day so far, with the yen depreciating 1.12% vs. USD, 1.38% vs. AUD, 1.35% vs. EUR.
Let’ take a look at today’s chart vs. yesterday’s on USD/JPY: (click charts to enlarge)
As you can see from the charts, today’s move in this pair is considered a “gap” up, meaning that there was strong demand to own this pair. This is likely the result of some short covering and unwinding of the carry trade, which has occurred due to the reasons I outlined in yesterday’s article.
This will show us if a new trend is emerging if price doesn’t return to “fill the gap”. I identified around the 89 level as the first layer of resistance yesterday so let’s wait to see if we can get to that level and then what occurs if we get there.
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Tags: account, AUD, blog, charts, course, currenc, currency, currency trading, EUR, forex, forextrading, free, fx, fxedu, Il, Japan, jpy, lower, market, Mike Conlon, pair, pip, pips, practice, technical, time, trade, trend, USD, Yen
Yesterday I wrote here about how Japanese officials are attempting to jaw-bone the yen lower. Today it looks like its working. As of this writing, we’re looking at a move of almost exactly 1 point, or 100 pips in USD/JPY. Yen weakness is the theme of the day so far, with the yen depreciating 1.12% vs. USD, 1.38% vs. AUD, 1.35% vs. EUR.
Let’ take a look at today’s chart vs. yesterday’s on USD/JPY: (click charts to enlarge)
As you can see from the charts, today’s move in this pair is considered a “gap” up, meaning that there was strong demand to own this pair. This is likely the result of some short covering and unwinding of the carry trade, which has occurred due to the reasons I outlined in yesterday’s article.
This will show us if a new trend is emerging if price doesn’t return to “fill the gap”. I identified around the 89 level as the first layer of resistance yesterday so let’s wait to see if we can get to that level and then what occurs if we get there.
To follow this trade real-time in a free, practice trading account, click here.
To learn more about technical analysis in the forex market, be sure to check out our currency trading courses!
Tags: account, AUD, blog, charts, course, currenc, currency, currency trading, EUR, forex, forextrading, free, fx, fxedu, Il, Japan, jpy, lower, market, Mike Conlon, pair, pip, pips, practice, technical, time, trade, trend, USD, Yen
Japanese Yen: Intervention Fears Stall Strengthening—For Now!
On the heels of the Bank of Japan’s emergency meeting at the beginning of the week in which policy-makers decided to extend quantitative easing to its credit markets, Japanese officials led by Prime Minister Hatoyama are suggesting various degrees of intervention to keep the yen from strengthening.Or are they?
Taking their cues straight from the Bernanke book of monetary double-talk, Japanese ministers are offering conflicting views about what course of action needs to be taken to slow down the yen, including trying to enlist international help.What they can all agree on is that a strong yen is bad for their exports and hence bad for their economy.
Regardless of the rhetoric and what may or may not happen, yen bulls are heading for the exits.This also coincides with the resumption of the risk-taking trade, as the market has for the time-being dodged any contagion from last week’s news out of Dubai.
So while it appeared that the market was not impressed by the emergency measures, it is taking notice of the three-ring circus that is the Japanese version of jaw-boning.All this in the name of “reducing volatility”.
Let’s take a quick look at a chart of USD/JPY: (click chart to enlarge)
Earlier this week the yen reached 15-year highs at 84.80 vs. the US dollar due to the Dubai news on that huge doji candle.Combined with a stochastic crossover near the 20 level could mean a possible trend-reversal, at least in the near-term.If this pair can stay below 89, then I expect strength to continue.Should it breach 89, then the next stop could be the 90.75 level.
If the yen moves back down to the 85 level, then expect more forceful words from the ministers, and don’t necessarily rule out intervention.What sounded like a good idea back in September could have major implications for the Japanese economy, especially if things don’t improve.
Also to keep an eye on for this pair is what is going on here in the US.The forex market practically blew-off Plosser’s comments that we may need to raise rates here sooner than later to ward off inflation, regardless of recovery status.While there is still much debate about where we are in the inflation/deflation realm, one thing can be certain: maintaining a zero-interest rate policy for a prolonged period of time will not be good for the US economy.
If rates in the US, or even talks thereof, rise, then look for the yen to resume its “natural position” as the currency of choice for the carry trade.
In the meantime, Japanese officials will do all they can to threaten intervention to buy time and slow yen strengthening.
Right back at ya, Bernanke!
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Just before I left on Wednesday for Thanksgiving, I noted on blog really quickly that the Japanese yen (JPY) was at a 10-year high to the US dollar. Well that was just the start of it. Let’s take a look at Wednesday’s chart of USD/JPY and a 5-minute chart of this pair when the Dubai news came out. (click charts to enlarge)
As you can see from the charts, this pair made a tremendous move in a matter of minutes! Yen strength occurs because of its pecking order in the risk-aversion trade. This weekend will be very important to find out if there is any contagion of this problem in Dubai– meaning if this is an isolated incident or is it going to affect the banks and world markets in general.
Stay tuned!
Tags: bank, blog, charts, dollar, Dubai, forex, forextrading, Il, Japan, jpy, market, Mike Conlon, minutes, pair, RSI, trade, USD, Yen
Is there an easier market to trade right now than the currency market?There are basically 2 trades going on: risk taking and risk aversion.While this will come as no surprise to anyone who’s in this market, investors in both the stock and commodities markets should also pay attention.
Let’s face it, if it were up to the market, stocks would be back to pre-Lehman collapse levels, gold bugs seem to be happy with the price of gold, oil would be extremely cheap,bank interest rates would be higher, yet mortgage rates would be where they are right now, and we’d have a strong dollar.Sounds just peachy, doesn’t it?
Of course it does, it’s a complete fantasy.Yet those in government believe they can create situations where they can attempt to achieve these ideal conditions.How do they do this?Through their words.
The nice thing about the currency market is that it tends to “trend” more so than other markets.This is good for investors.But bad for policy-makers.Especially if they are firmly rooted in a downtrend.The direction of the trend is established by their decisions, so it follows that they way to change the trend is by changing their decisions.
The conflict occurs when they try to achieve the ideal conditions as they are seeking to make the impossible possible.And in no currency is this truer than the US dollar.After all, in having the world’s reserve currency, US policy makers have a little more juice than their counterparts.This means that almost all markets are affected by US policy.
Again, nothing new here but what it does illustrate is how the markets have essentially become a “tale of two trades”.The risk taking trade (sell USD &JPY, buy stocks and commodities) and the risk aversion trade (buy USD & JPY, sell stocks and commodities) is not only a bit counter-intuitive, but also a case of “throwing the baby out with the bath water.”
A perfect example of this was President Obama’s double-dip recession comments from earlier this week.While the timing of these comments has been debated in the blogosphere, one thing can be certain.Obama was clearly trying to send a message to the Chinese that it is very easy to change the short-term direction of the US dollar without having to change policy.He can do it through his words.
I mean, is the US really in any more jeopardy of falling into the double-dip on Wednesday then it was a week ago?A month ago?A month from now?What this does is slow the pace of the dollar decline, to appease our largest debt-holder.And what we’ve gotten is two days of the risk-aversion trade.
Surprise!
Those comments notwithstanding, what happens if we really do fall back into double-dip recession?
Based on the “tale of two trades” scenario, one would likely assume that investors would dump stocks and commodities and buy US dollars and Japanese yen.However this time I think it might be different.
While stocks will surely take a beating, and oil will sell off due to decreased demand, I think I’d still want to hold gold over US dollars, even if it is losing value.There is a reason why guys like David Einhorn and John Paulson are investing heavily in gold, as the flight to safety trade should be to the precious metal and NOT the US scrip.
I also wrote recently that regardless of what the risk trade tells me, I want to be long the Australian dollar (AUD).Not only for the interest rate differential via the carry trade, but also because of the Australian economy’s link to gold.
So while US policy makers like to get cute with the rhetoric, I’m closing my ears and keeping my eyes open!
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The minutes from this month’s Bank of England (BOE) policy meeting have caused the British pound (GBP) to fall this morning, most notably vs. the Euro (EUR) and the Swiss franc (CHF), both around -.8% this morning. The reason for this move was that British policy-makers were split 3 ways in deciding how to extend their quantitative easing program and brought up the possibility of lowering deposit rates on reserves.
As I’ve discussed before, the Brits are by nature a fairly conservative bunch, and markets most definitely don’t like uncertainty. However, by agreeing to expand their debt-purchases, it is pretty clear that the majority are concerned about deflation today, at the risk of incurring inflation down the road.
Nevertheless, while the pound is down today, it is not experiencing what I would call a “major” sell-off. This could be because while the fundamentals are saying the one thing, the technicals could be saying another.
Let’s take a look at a 4 hour chart of GBP/JPY (click chart to enlarge) as this is a popular pair that is traded.
What we are seeing on this chart is what’s known as a “triangle” formation. Based on the direction that the move had occurred, I would call this a bullish pattern. So we are basically looking for a break-out to the upside (outside of the triangle) to occur. However, today’s news has actually caused this pair to break to the downside.
Does this mean that the pattern has failed and to expect this to trade down now? Not necessarily. What sometimes occurs with patterns such as these is that we get “false breakouts” or “head-fakes”. This means that the initial move is opposite what you expect to happen, so you give up on the pattern– before the move you expected takes place.
So does this mean that we are going to see movement to the upside? Again not necessarily. Are you confused yet???
At this point the way to trade a pattern that hasn’t done what you have expected is to wait for confirmation. What this means is that you want to wait for a few more candles to see what happens.
I think of a lot of reasons why GBP can trade higher that JPY despite this most recent news. So I’m going to be keeping an eye on this pair. I’m going to place a buy stop to go long just above the top of the triangle, say at 150.4.
So check back later to see if this gets executed.
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Much like Mr. Miyagi’s advice to Daniel-san, today’s forex market is a case of wax-on, wax off. The lesson to be learned here is that the more things change, the more they stay the same. What do I mean by this? Well, it is rare that any investment just moves in one direction without experiencing some sort of pullback, sideways action, or just a brief pause.
The thing that makes the currency market so nice to trade is that the market tends to “trend” more than other markets such as the stock or futures markets. The reason for this is because the currency markets are driven by fundamental policies of major countries around the world, and it is a rare situation that these policies shift as frequently as other markets.
So one of the easiest ways to participate is to just find currencies with identifiable trends– and then trade with them! I’m sure you’ve hear the phrase ,”the trend is your friend”– and this couldn’t be more true than in the forex market.
So today the market is risk-off day, as the last few days were risk-on! As to be expected, there is US dollar (USD) and Japanese yen (JPY) strength, and Australian (AUD) and Canadian (CAD) dollar weakness. So if you’re a short-term trader, you can make a few bucks playing the counter-trend move on the smaller time-frames.
However, overall, the thing you should be looking at is the trend. Let’s take a look at the AUD/USD pair: (click chart to enlarge)
So even though, this pair is down (1.01%) today, the overall trend is up. So this is what we would call a buying opportunity. Now, does that mean that this pair is going to continue higher forever? No, of course not. But until there is a fundamental change in the economy, policy, etc. this represents a low-risk opportunity to get into the trade. Not to mention the daily interest you will make from this pair!
And as a trader, this is exactly what you should be looking to do: get into trades that are low risk with potentially high rewards.
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The British pound (GBP) is weak across the board today as BOE Governor King re-iterated that a weaker currency should lead to a recovery in the economy.This comes on the heels of a better than expected unemployment report, though not enough to buoy the sentiment for a rapid economic recovery.
As a result of subdued growth prospects, the BOE increased its quantitative easing program to $200 billion pounds last week to pump liquidity to the financial system.Some have argued that their conservative, controlled approach to asset purchasing was a major reason why GDP shrank an unexpected .4% back in October, as other nations were exiting recession.
Also to note was that the BOE said that inflation will stay below it 2% target for the next three years, thereby all but confirming that deflationary pressure is the concern for today.As a result, don’t expect any interest rate hikes anytime soon.In fact, a Bloomberg survey of economists showed that the median thinks they will maintain rates at .5% until the Q3 of 2010.This also leaves open the door for increased asset purchases going forward.
As I wrote in an article back in September, I couldn’t envision the pound falling against the US dollar in the near-term as, “Bernanke’s path to dollar destruction has been well-documented”.But I did caution against the pound in the long-term as the problems that are inherent in the British economy are coming into play today.Since that time, GBP/USD did decline further before going on a tear from mid-October until now.
Here’s a good article from BBH’s Marc Chandler from yesterday presciently calling for GBP weakness.
One of the other things I talked about in my previous article was the pound’s positive correlation to the S&P 500. Here’s a chart of the British Pound ETF (FXB) and the S&P 500 (SPY). (click chart to enlarge)
Well since that time, it looks like this correlation has stalled and we could be in for a possible decoupling of this correlation. (click chart to enlarge)
Or could this move down in the pound be foreshadowing a move down for the US equities markets?Now that earnings season is over, there doesn’t appear to be a catalyst that will move the stock market higher other than Bernanke’s commitment to dollar weakness.
If we do see a pullback in the US equities market, then expect the US dollar to strengthen as the risk aversion trade is sure to hold up.
Either way, I expect a bit of fireworks in the New Year!
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